Goodwill: International vs UK Accounting Standard - Essay Example

Under the first method, Goodwill acquired on account of mergers and acquisitions use to get amortized in equal installments over 40 years. Under the second method, the Goodwill was considered as a permanent asset, which would not reduce in value with the passing of years, thus enabling the companies to test the same for impairment on an annual basis to ensure that the fair value of the Goodwill was equal to its book value. Apart from the annual review, the impairment could also be exercised in instances where it indicated that the carrying amount of Goodwill needs reassessment.

The process of assessment of impairment consists of two steps. Firstly, it involves a comparison of the intrinsic value of a business with its carrying amount including Goodwill. In case the book value exceeds the fair value, then nothing needs has to be done. On the other hand, if the fair value is lesser than the book value, impairment would be carried out. Under the US GAAP, the fair value of Goodwill is calculated by allocating fair values to unit assets and liabilities. In the case of impairment of Goodwill, the same should be charged to the Profit and Loss Account. The International Accounting Standards also followed the footsteps of the US GAAP concept.

The basic difference between the UK and the International Accounting Standards is that in the former the Companies were allowed to opt for either of the two options. The Companies could either choose the amortization method or exercise the systematic testing for impairment method. Under the latter, the amortization of Goodwill was banned. Instead the same was required to be tested for impairment on an annual basis by comparing the fair value of the reporting unit with its carrying amount. Also in case of any event occurring which tends to have resulted in impairment of the Goodwill, immediately a review would be required to be carried out. On the contrary, where there is a substantial excess of fair value over the carrying amount, the review would be deferred.

Under the new IFRS, the concept of purchase accounting has been adopted, unlike the former system where Goodwill used to get amortized. At present, Goodwill is not eligible for amortization anymore and is regarded as an asset with infinite life. It requires an impairment test to be carried out just like in the case of US GAAP & International Accounting Standards on an annual basis or as and when required. Similarly, the amount of erosion in the value of Goodwill would be debited to the Profit and Loss Account.